Dealing with the ongoing fall-out of decisions made in 2020

At the moment, for reasons I really don’t need to go into, there is a lot of focus – politically at least – on what was happening back in 2020.


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Thursday 24th February 2022

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Decisions made back then are having repercussions right now for those who hold the highest positions in the land, and it’s really no different for mortgage borrowers, particularly when it comes to the financial choices they might have made back then.

So much water has flowed under the bridge since those early days of the pandemic that it might be difficult to recall just exactly what happened, but advisers will no doubt be dealing with the ongoing fall-out of decisions made, particularly when it comes to the mortgage payment holidays taken out by borrowers.

The ‘payment holiday scheme’ was introduced almost immediately after lockdown was announced, and between March 2020 and July 2021 2.9 million deferrals were active, allowing borrowers to defer their monthly mortgage payments for up to six months.

At the time, and quite rightly, there was a significant discussion around the consequences of making this decision, particularly from a future credit-worthiness perspective and what it might mean for borrowers as they sought to secure further borrowing down the line.

Consumer groups lobbied successfully for mortgage payment holidays not to be deemed a negative on individuals’ credit reports and many people took confidence from this and, even if they were hedging their bets, decided to take out a holiday just to give themselves peace of mind.

At the time, many within the financial services sector including advisers, suggested that things might not be as clear cut as they appeared to be. After all, lenders have a responsibility when looking at client affordability to review all aspects of their credit-worthiness, and just because a holiday wasn’t going to show on the report, doesn’t mean it wouldn’t be clearly visible to the lender reviewing the application.

A quick look at banking statements and details would have highlighted a mortgage payment holiday having been taken, and it seemed obvious that lenders would be taking that into account when they made their decision.

And so it has come to pass. It may well be that borrowers who took out mortgage payment holidays at some point over that 16-month period are only just coming up to a point where they are looking for a remortgage, or a further advance, or other types of borrowing, but we are increasingly seeing a large number of clients who have found it difficult to secure what they need via a first-charge lender, and delving into their finances we can see they took out a mortgage payment holiday.

Now, this is not the case for everyone of course and there will be other elements at play when determining that affordability, not least their employment, the type of sector they work in, their current income level and whether it’s been impacted through the pandemic, and all other aspects of a financial situation, but it will not take a genius to work out that payment holidays are being taken into account.

Indeed, some borrowers didn’t just take out one mortgage holiday, plus they might also have had an agreement with their lender to pay a reduced amount over a longer period of time, or they were allowed to move to interest-only after the holiday for a period. It all adds up to putting doubts in the minds of some lenders about whether they can either offer their existing borrowers a new rate, or whether they are willing to offer a new customer a mortgage.

Which is leading a growing number of borrowers and their advisers to the second-charge market in order to secure the finances they want and need. Second-charges can work very well for these customers, especially as they are likely to have benefited from house price increases over the last few years hopefully delivering them extra equity in their property which they can access via a second-charge.

Again, this is not a catch-all option and we clearly carry out our own checks on affordability and sustainability, but the second-charge mortgage can certainly be an option for borrowers who are finding themselves in such a situation, and will be a useful addition to advisers’ product tool-kits should they be looking for a solution.

 

Author:
Kerri Pender Evolution Money
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